http://blogs.the-american-interest.com/wrm/2011/10/23/rhode-island-athens-of-america/October 23, 2011
Rhode Island: Athens of America?
Walter Russell Mead
Rhode Island is looking more and more like Greece, and not in a good way. That is one message of this important piece by Mary Williams Walsh in the New York Times. Years of blue social policy have wrecked local and state government finance in the country’s smallest state, and now the bills are coming due. Services are being cut to the bone and elderly retirees are losing money they thought was secure.
In Rhode Island, it is Democrats, not nasty union-hating Republicans, who are doing the dirty work. Democratic mayors are telling their unions that there isn’t any money — not because they are vicious corporate stooges who hate working people and want to see them suffer, but because There. Isn’t. Any. Money. Because Rhode Island listened to timeserving blue politicians too long, and union leaders and public sector workers lost their grip on any mathematical realities beyond the numbers at the ballot box, the pension system grew more and more out of control. State and local governments lurched into a crisis. Vote yourself a raise, vote yourself a pension: why not?
But there is financial math as well as political math and in any war with financial arithmetic, the money numbers win. If there isn’t any money, the checks won’t clear. Ultimately, you will have to fire existing workers, stop paying pensions or a mix of both. That is where Rhode Island is now: its economy can’t generate the revenue to support its existing governance system and to pay its pension obligations.
The Ostrich Party has long ruled Rhode Island; their heads planted firmly in the sand - if not in even darker and damper regions – Rhode Island politicians, government and union officials have done everything possible to conceal the true state of affairs from the voters, the bondholders, retirees and even themselves. Unrealistic assumptions about rates of return helped hide the ugly truth about the looming pension meltdown — and anybody who tried to raise the alarm about the coming crisis was hooted down as an enemy of the workers. Even now the true blue firing squads are assembling to shoot the messenger; Mary Williams Walsh can expect angry push back from a whole sector of American political life that thinks this whole problem will go away if we tax the rich, clap our hands and all say together, “I believe in government”.
But “objectively”, as our Marxist friends would say, the union leaders and their political chums were the worst enemies of the workers: they told state workers that their benefits were secure even as it became increasingly obvious that, as a matter of arithmetic, they were not.
Let’s be crystal clear about this. To tell a 50 year old pretty lies about the soundness of a pension plan is one of the most wicked and irresponsible things you can do without actually shedding blood; people who believe these phony promises will not make the extra savings, work the extra years or otherwise take steps to protect themselves until it is too late. Telling those pretty lies is exactly what Rhode Island’s establishment has been doing for some time; it is what Ostrich Party legislators, trade unionists, journalists and governors are still doing across much of the country.
Reasonable reforms could have made things much less painful, but the unions typically threaten to destroy the careers of any politician who tampers with the pension system until the truck actually starts falling over the cliff. Now the long fall has begun and Rhode Island and its retirees are caught in a cascade of bad news, lawsuits, and financial crisis. No Rhode Island retiree can rely on getting the benefits promised; nobody can predict how this will all work out.
That is not the kind of uncertainty that 70 year old retired teachers and firefighters should have to face. A decent society would not let that happen — but the blue social model in its decadent late shark-jumping years of fake promises is anything but decent. Political chicanery, fuzzy math, denial, rhetoric, ambition: this is how a union betrays its members, this is how politicians betray their constituents. To give the devil his due, this monumental crack up was the result, in its early stages, of ignorance and complacency more than anything else. The union leadership and the statehouse pols took growth for granted. They had grown up in the post war boom; good times were what they expected. They believed that the American economy would continue to grow richer every year and that there was a never-failing cornucopia of “more” somewhere that would somehow make sure that there was always enough money in the kitty to redeem the promises made. You could always squeeze another quart out of the milk cow.
This was a natural mistake to make — in 1972. But state and local government ignored a generation of warnings that the wheels were coming off the car of the blue social model, and especially in rust belt states like Rhode Island. Factories closed, the economy changed, the state fiscal picture grew steadily worse, but these facts were not allowed to penetrate the closed shop in which the union leaders and their political allies made plans for the future. The state’s economy would continue to grow at a rate which would make it possible to pay new state workers higher and higher salaries even as a growing number of retirees could collect increasingly generous pensions — adjusted, of course, for inflation every year. You could tax the rich, defer maintenance, hit the bond markets — and when all else failed, you could assume that your underperforming pension reserves were invested in magic growth beans that would automatically gain 8.5 percent in value forever.
Providence City Hall (Wkimedia)
The union leadership in Rhode Island, as in the majority of US public and private workplaces, failed in the first task of the stakeholder: they failed to undertake and support changes that would ensure the health of the enterprise down the road. This is partly about wages, pensions and work rules: making unrealistic demands only stores up trouble down the road. But more profoundly it is about not thinking seriously about the future of the company or, in Rhode Island’s case, of the state.
What economic development options did Rhode Island have to build a sustainable new economy as the old one withered away? Locked into the assumptions of the blue social model, Rhode Island planners, like their counterparts across the country, fell for white elephant concepts like convention centers, those cliched “new urbanism” pedestrian malls and downtown redevelopments that never seem to work, Solyndra style industrial policy and all the other failed nostrums that strike upper middle class social engineers as cool but that rarely make anything as vulgar and utilitarian as money.
There was a lot of expensive churn, many consultants deposited checks, but the underlying economy never turned around. The serial failure of one plan after another to regenerate solid growth, turn around the population trend, put Medicare on a sustainable path, and reverse the decline of the cities never led to a questioning of basic assumptions — and it never led the Ostrich Party to think through the implications of economic stagnation and decline for the state’s pension system and its future budgeting.
More care and foresight could have spared Rhode Island’s workers and retirees some of the sacrifices that will now have to be made. But that would have forced the many members of the Ostrich Party to pull their heads out of the warm and comfortable dark in order to look around and act. Denial was psychologically more comfortable and politically safer. The more untenable the old system became, the more tightly they shut their eyes and closed their minds.
The lesson goes farther than Rhode Island. As Walsh points out in the Times, Rhode Island style pension meltdowns look increasingly possible in hard pressed cities and states across the country. Can public sector union leaders in other states begin to think proactively about how to build a post-blue economic future and put their muscle behind genuinely forward looking development ideas or will they wait, as in Rhode Island, for the truck to go over the cliff?
We can dream. Yes, we can.
After Rhode Island, What Next?
As the American political system attempts to grapple with the growing pension, debt and entitlement crisis, three types of responses seem to be emerging. There is the true blue ostrich approach of the unions themselves and their closest allies: denial and rage. There is the attitude of more centrist Democrats like Governor Cuomo and Mayor Emanuel: make prudent cuts, hold the line on spending, work to quietly make government more efficient without jumping into a full scale confrontation with the unions. And there is the Scott Walker, dragonslayer approach: take them on.
The rage and denial crowd in the Ostrich Party, rumps in the air, have nowhere to go. Both the Cuomo and the Walker approaches have their merits — though it seems to me that neither is exactly what we need. Cuomo style gradualism may soften the hard landing, but it doesn’t do enough to reverse the decline of the blue state economies. Upstate New York is in desperate shape, and it cannot prosper without a radical reduction of its cost structure. New York City is simply becoming more and more of an appendage to Wall Street, even as public opinion in the city turns against the one healthy industry it still has. Governor Cuomo’s policy mix holds out hope to slow the decline — but there is little to suggest that New York can go back to the innovation and leadership that once made it the country’s most dynamic growth engine and a wonder of the world.
The Cuomo/Emanuel Democrats want to fight the unions and the government lobby over specific issues, but they don’t want to pay the ideological and political costs of taking on the worldview behind the blue model machine. I think leadership today has to do more: political leaders need to talk to the public about what has changed and why, and talk also about where we can go from here. Intelligently managing the decline of the blue social model is better than nothing, but what is really needed is to prepare a transition to a new kind of growth.
But if the Mama Bear New Democrats serve their porridge too cool, the Papa Bear Republicans like Wisconsin’s Scott Walker and Ohio’s John Kasich risk serving it too hot.
Polarizing politics and demonizing state and local government workers is not a good idea. It is unfair for one thing; it is bad politics for another. Toxic blue model legacy costs are the problem: rigidly bureaucratic government structures, unrealistic costs, years of underfunded pension plans, regulations that choke growth and initiative, outdated progressive ideas about how change works — these are the roots of our problems, not the middle school teacher down the street or the retired post office worker living modestly on a pension that may be underfunded but is hardly a bonanza.
The fifty year old teacher, fireman or police officer may have been naive to believe his or her union leaders, the politicians and the journalists who all said there was nothing to worry about — but most of those workers cannot be called “greedy” or “selfish”. They are victims of a complex, multi-player Ponzi scheme and have been lied to by a lot of people for a long time. They also face some serious financial costs. Not only are their pensions likely to be less generous and solid than they were led to expect; they may well face layoffs and wage freezes as states struggle to cope with legacy costs.
The first church in Rhode Island, founded by Roger Williams (Wikimedia)
Reform cannot and should not be understood simply as an assault on state and local government workers — although these workers cannot be insulated from the general consequences of a major failure of our political system. The problem is not that teachers and firefighters earn “too much” money; the problem is that we have developed a dysfunctional social system which cannot pay its bills. The public economy needs to be rationalized and restructured, but the most important job is to revitalize and energize the private sector. Ultimately the only solution is for the country to move on to a new post-blue economic model that can generate enough wealth to cover our existing debts. In the absence of a serious growth agenda, both the Cuomo and the Walker approaches can’t get the job done. And what the country needs is a competition between growth strategies, not a contest between strategies for cutbacks.
In the meantime, there is one thing that state and municipal workers and taxpayers can and should demand: honest and transparent accounting standards that make absolutely clear and explicit what the state of public pensions systems really are, what the assumptions are that underpin them, what the chances are that the systems may fall short, and what the fiscal consequences of any shortcomings are likely to be. Those reports ought to be annual, they ought to be impartial, they ought to be conducted in accordance with the strictest accounting principles, and the results ought to be public.
This is something that everybody should support: from the Tea Party to OWS and beyond; accurate public reporting on the state of worker pensions should be a no-brainer. If we can’t solve our problems overnight, let’s at least have a no-denial zone when it comes to public pensions.
Defend your country: kick an ostrich.
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